During the recent recovery we have noticed high profit level

During the recent recovery, we have noticed high profit levels and high production levels by firms, yet unemployment has remained relatively high. Explain this issue by discussing the use of capital and labor in the production of goods and services.

Solution

A production technique used in production of goods and services employ both labor and capital. In general, higher ise of one input lowers the use of the other input, keeping output level unchanged.

As technology progresses, firms are using more automated and mechanized production techniques. Higher automation and use of technology lowers the requirement for labor. Therefore, demand for labor is going down.

This explains the apparent paradox of output and profit rising along with unemployment. Firms are using more capital-intensive automated production techniques, curtailing the demand for labor and reducing employment. That\'s why unemployment is still high.